Third degree price
discrimination is also called 'Market
Segmentation'. That is, the
seller splits the market into different groups of buyers and charges
different prices on them. The pricing policy of the MTR in Hong Kong is
a case in point, where students are given discount but not adults.
Price
& Output
determination (Stigler's approach)
Accroding to
Stigler's approach, pricing is based on the
differences in the price elasticities of demand of different groups of
buyers. Buyers with lower elasticity are charged with higher
price.
The pricing policy is
as follows:
Produce at a
point where MR equals MC, say Qm. (Click to read 'Diagram5')
Separate the
market based on elasticities of demand, say markets a and b.
Distribute
Qm to the two market such that the MRa = MRb=MC. Follow the steps
below:
1.
Set MRa=MC and determine the quantity to be sold in market a and
charge a price at the MV of the market.
2.
Set MRb=MC and determine the quantity to be sold in market b and
charge a price at the MV of the market.
Note
that both MRa & MRb = MC, i.e., MRa=MRb=MC. (If MRa>MRb, the
monopolist can sell more in market a and less in market b to make a
gain! Therefore, MRa should equal MRb.); Besides, the market with
less elastic demand pays higher price. Finally, Qa+Qb must equal
Qm.
In sum, the
maximizing condition is MRa=MRb=MC
Note: Certainly, if
the above pricing requires the seller's ability to identify and separate
different groups of consumers according to their differences in the
elasticity of demand. In other words, the sellers must be able to prevent
reselling. (Click
here to read more!)
